EC 225 Chapter 13 Notes
EC 225 Chapter 13 Notes EC 225
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This 3 page Class Notes was uploaded by Danielle Rios on Friday October 14, 2016. The Class Notes belongs to EC 225 at Southeast Missouri State University taught by Dr. Chen Wu in Fall 2016. Since its upload, it has received 7 views. For similar materials see Principles of Macroeconomics in Economics at Southeast Missouri State University.
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Date Created: 10/14/16
Chapter 13:Aggregate Demand and SupplyAnalysis 13.1 Aggregate Demand The aggregate demand and supply model explains the relationship between real GDP and price level in the short term o This contains the aggregate demand (AD) and the short run aggregate supply (SRAS) curves Price Level SRAS AD 0 Real GDP o The AD curve slopes downward because lower price level leads to increased quantity o Shifts of the Aggregate Demand Curve vs Movements Along It Changes in the price level moves up or down the aggregate demand curve Changes in anything else shifts the curve to the left or to the right o Variables that Shift the Demand Curve Gov. policies Monetary Policy: actions of the Federal Reserve meet policy objectives Fiscal Policy: federal tax and purchasing changes which are in place to meet policy objectives Increase in gov. purchases shifts AD to the right Increase in personal income shifts AD to the left Increase in business taxes shifts AD to the left Expectations of firms and households If households and firms become optimistic about future incomes, AD shifts right Foreign values If U.S. firms and households purchase more foreign goods or other countries buy fewer U.S. goods, AD shifts left Chart on page 440 13.2 Aggregate Supply The Long-Run Aggregate Supply Curve (LRAS) demonstrates the relationship between real GDP and the price level in the long run The Short Run Aggregate Supply Curve (SRAS) o It is upward sloping because quantity increases as price level increases o 3 factors affect the changes in wages Contracts because there is not a way to completely predict the outcome of a contract Firms adjust wages slowly because a prediction might be off Menu costs impact how quickly a firm can change prices o Shifts of the SRAS vs Movements Along it If the price level changes, there is movement If any other factor changes, it shifts o Variables that Shift the SRAS An increase in the labor force shifts SRAS right Changes in Technology shift the curve right If workers and firms adjust the price level to be lower than expected, the SRAS shifts left Supply shock: unexpected event (If these raise costs, the SRAS shifts left) o Table of this on page 448 13.3 Macroeconomic Equilibrium in the LR and SR Recessions o SR: When RGDP falls below a potential level o LR: When equilibrium moves back to a potential level Expansions o SR: When AD shifts right because firms are operating beyond their normal capacity, RGDP is above PGDP o LR: Over time, the price level will match what workers make, and the economy will shift back to equilibrium Supply Shock o SR: Stagflation is the combination of recession and inflation, GDP lowers and SRAS shift left o LR: Over time, equilibrium will return or monetary and fiscal policy will be used to bring the AD curve right 13.4 A Dynamic AD and AS Model Created based on the facts: o LRAS shifts right as potential GDP is always increasing o AD shifts right during most years o SRAS shifts right unless there is a high inflation rate o Changes in price level and RGDP are determined by shifts in the SRAS and AD o Figure 13.8 on page 456 demonstrates the new model and how to understand inflation using it Inflation is caused by total spending growing at a faster rate than total production Notes by Danielle Rios
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